Mexico: a giant step back from dirigisme – Invesco’s Newman explains

Dean Newman, Head of Emerging Markets at Invesco Perpetual, discusses why the Mexican government’s energy reform bill could help realise the country’s untapped potential.

Last month I was in Mexico City visiting companies when my taxi unexpectedly got held up by a small number of protesters blocking a roundabout. The location was at El Ángel, one of the most recognisable landmarks in this vibrant city and a focal point for celebrations and protests.

This time around the demonstrators were protesting against the government’s energy reform bill which had just become law following approval by Congress and subsequent ratification by a majority of Mexico’s state legislators.

The legislation paves the way for private energy companies, both national and international, to explore for, and produce, oil and gas under licences and profit-sharing agreements.

It also heralds the end of a 75-year state oil monopoly.

During this time state-owned Pemex has endeared itself to average Mexicans, tugging hard at the nation’s heartstrings.

However, the nationalised energy sector these days delivers few benefits to Mexicans. Petrol is more expensive here than in the US and even subsidised electricity tariffs are amongst the highest in the world (Financial Times, December 2013).
Furthermore, oil production in Mexico has fallen by a quarter over the past decade with factories having to pay 45% more for its electricity than factories in the US, according to Barclays (December 2013).

Whether Pemex is badly run or starved of capital, it has struggled to reap the benefits of what lies below the ground.

Estimates from JP Morgan (December 2013) suggest that opening up Mexico’s energy sector to competition from abroad could boost economic growth by potentially attracting up to US$20 billion of foreign investment annually.
The overhaul could propel Mexico into the top five crude exporting countries and help to develop the largest unexplored crude area after the Arctic Circle.

The country certainly has the potential to significantly increase productivity.

I believe that by introducing competition to the oil sector, supported by key reforms in the telecoms market and education sector, Mexico’s untapped potential will soon start to be realised.

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